Dividend Distribution Tax

Dividend Distribution Tax was presented in Finance Act 1997 as Section 115-O under Chapter XII-D of Income Tax Act, 1961. It is the tax imposed on the amount distributed by the company by the method of a dividend. It is payable in addition to income tax. The company shall be accountable to pay the tax within fourteen days from the date of announcement of dividend or payment of dividend or distribution of dividend.

On February 1, 2020, the Finance Minister of India had abolished the Dividend Distribution Tax (DDT). This is an important concept for all aspirants preparing for the upcoming IAS Exam

What is the Dividend Distribution Tax?

  • The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits
  • Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax
  • Any domestic firm distributing dividend had to pay this tax at 15% on the gross amount of dividend
  • India’s DDT provisions were introduced in the Finance Act 1997
  • The Dividend Distribution Tax was to be paid by the firm within 14 days from the declaration/distribution/payment of dividend, whichever was the earliest
  • The DDT was also applicable on mutual funds

Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG) tax are the other major taxes which were implemented along with DDT levied on market instruments.

To know about the Taxation System in India, candidates can visit the linked article.

Reasons for Abolition of DDT

The Union Budget decided to remove the DDT for multiple reasons. The abolition of Dividend Distribution Tax would benefit the country in multiple ways including:

  1. To increase the attractiveness of the Indian Equity Market
  2. To provide relief to large class of investors
  3. To make India an attractive destination for investment

Direct Tax Code Panel which was set up by the Government of India to formulate a new direct tax code to replace the existing Income Tax Act was the one to first suggest the abolition of the Tax. The then Chairperson of the panel was Akhilesh Ranjan.

The DDT was initially abolished in 2002 but was re-introduced in the year 2003. Later, it was completely abolished in 2020. Given below are the reasons for the abolition of DDT:

  • Since DDT credit was not available for most foreign investors in their home countries, this was a cause of reduction of the rate of return on equity capital for them
  • It was acting as an obstruction for the foreign direct investment flow
  • Getting rid of this tax may increase foreign investment in the country

The Central Board of Direct Taxes (CBDT) is the authority vested with the responsibility of the administration of laws related to direct taxes through the Department of Income Tax. To know more about CBDT, visit the linked article.

Impact of Abolition of DDT

The abolition of the Dividend Distribution Tax has left an impact on the taxpayers:

  • DDT has been removed on both, companies and mutual funds
  • The debt fund investors who are in the lower tax bracket will benefit from the removal of DDT
  • It will encourage low-income earners to invest in capital market
  • The idea behind the removal of DDT was to cascade the impact of taxation with no preferential treatment for any class of investor

For other tax-related terms and concepts, aspirants can refer to the table given below:

Question for the Day on the Topic

Consider the following statements

  1. Dividend Distribution Tax imposed on the amount distributed by the company by the method of a dividend.
  2. The company shall be accountable to pay the tax within fourteen days from the date of announcement of dividend

Select the correct ones

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer: C

Frequently Asked Questions about Dividend Distribution Tax

Who pays Dividend Distribution Tax in India?

In India, a company which has declared, distributed or paid any amount as a dividend, is required to pay a dividend distribution tax at 15%. The Finance Act, 1997 introduced the provisions of DDT. Only a domestic company is liable for the tax.

How DDT is calculated?

The calculation method of DDT is known as Complex Gross Payment Method. This method states that if an organisation has declared a dividend of Rs 10 per share, then it is required to pay Dividend Distribution Tax of ((100*0.15/ (1-0.15)) = Rs 1.1765 per share).

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